Manitoba’s Equalization Shell Game

In the summer of 2005, Manitoba’s capital felt like a city suspended in time. The skyline hadn’t changed much over the years, it seemed to me, and the downtown architecture belonged to another era. Eerier still were the soggy fields that surrounded the city and how, at the southern edge of the legislative grounds, the Assiniboine River lapped ominously halfway up the street lamps that otherwise welcomed visitors.

Not that Winnipeg was in danger of experiencing its sixth flood in 200 years, but it was a reminder of a vast prairie water resource that both helps and harms.

This week, – 41.7 C temperatures provided another reminder — this time of “Winterpeg’s” reputation as one of Canada’s coldest cities. “No school buses,” Peter Holle told me in a telephone interview. “It’s a normal, cold winter. The rivers froze a week early.”

If that sounds a bit contrarian, it is, but the president of the independent Frontier Centre for Public Policy (FCPP) makes no apology. The FCPP website rebuts current climate change orthodoxy, for instance, with a witty, science- accessible video presentation by Canadian climatologist, Dr. Tim Ball.

It is by challenging one of Canada’s defining programs, however, one from which Manitoba is a primary beneficiary, that the contrariness of the FCPP is most remarkable. At last September’s Calgary Congress, Holle’s presentation exposed how the federal equalization program is “Killing with Kindness .”

Over the past half- century, equalization shifted some $ 225 billion from Canadian taxpayers to governments in the so- called “have- not” provinces. At 48 per cent of total transfers, Quebec is the biggest beneficiary but at 11.2 per cent and with a much smaller population, Manitoba hasn’t done badly, either. The result is what contrary thinkers call the “flypaper effect“— that is, any money “thrown” at governments tends to stick.

The flypaper effect builds on an argument made in 1950 by American economist and Nobel Laureate James Buchanan, who first viewed equalization as a tool for discouraging the movement of people to high service areas. But Buchanan’s key points — tying transfers to increased mobility and productivity or, better, lowered personal taxes — were ignored when Canada adopted his theories in 1957. Buchanan then predicted that government to government equalization would result in an expanded public sector in the recipient areas.

Which is exactly what has happened. Manitoba has 32 more civil servants per thousand residents than elsewhere while since 1961, its share of the Canadian population and GDP has declined by 25.7 per cent and 24.1 per cent, respectively. Today, per- capita health and education spending is the highest in Canada while business investment is third- lowest.

And don’t think it’s just because the “have” provinces, Alberta and Ontario, have superior resource or manufacturing bases. The “Asian tigers,” writes one FCPP analyst, also have limited raw resources, but they succeeded “by adding value, exporting knowledge and staying out of the way of progress.”

In any case, in Manitoba there’s all that hydro power. But imagine Alberta selling its energy resources at half price like Manitoba hydro does. What pays for the rest? Equalization transfers, 60 per cent to be exact, pay for below- market electricity pricing in Manitoba. What to do? Escaping the equalization trap will be no easy task, but it is in the realm of possibility. Removing resource revenues or tying transfers to infrastructure and education would simplify the formula, for instance. Or in return for a one- time payment of all provincial debt, the federal government’s equalization commitment could then be freed to pay its own debt. Or it could simply hand over its GST revenue (almost $ 29 billion) to substitute for equalization and CHST programs (almost $ 33 billion).

But don’t expect major changes in the coming federal budget. “A minority government won’t be thinking far outside the box,” says Holle, never mind the premiers can’t agree on a new formula. For meaningful change, there has to be a shift on the ground — a government going broke, say, or one becoming so frustrated it challenges the Constitution’s weakly worded equalization requirements.

Until then, don’t hold your icy breath waiting for an uptick in the Manitoba economy. The only new construction you’ll likely notice in downtown Winnipeg is yet another Manitoba Hydro building — this time new headquarters in a $ 150 million, state- of- the- art, “ green” building.